Question
Consider the stocks in the following table. Assume a price-weighted index is formed by three selected stocks. Initially (at time t=0), the index contains stocks
Consider the stocks in the following table. Assume a price-weighted index is formed by three selected stocks. Initially (at time t=0), the index contains stocks A, B, and C. In the last period (moving from t=1 to t=2) stock C is replaced by stock D.
| Time t=0 | Time t=1 | Time t=2 | |||
Stock | Price | Shares | Price | Shares | Price | Shares |
A | 90 | 100 | 95 | 100 | 95 | 100 |
B | 50 | 200 | 45 | 200 | 45 | 200 |
C | 100 | 200 | 110 | 200 | --- | --- |
D | --- | --- | --- | --- | 20 | 500 |
a) What is the price of the index at time t=0?
b) What is the price of the index at time t=1?
c) What is the first-period (from t=0 to t=1) rate of return on the index?
d) What is the divisor of the index at time t=2?
e) What is the second-period rate of return (from t=1 to t=2) on the index?
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